Op-Ed: Australia’s super profit tax on miners - Can it work at all?

Australia’s gigantic mining industry recently received a real shock from the government’s announcement of a proposed super tax of 40% on profits. Shares staggered, and a war of words between the furious mining industry and the government has ensued.

The super tax has stunned the country. Although a coherent argument has been raised regarding the value of these “non-renewable” sales, 40% is a lot of money. The inferences have varied from a number used to produce good budget figures to a cash grab to an attack on the mining industry.

In the midst of this a claim that the miners avoid tax by the government has added a lot of fuel to a raging fire. Meanwhile, a Parliamentary hearing heard from Ken Henry, a senior Treasury official, a strong argument in defence of the tax. Mr. Henry is clearly not a neophyte. His testimony was credible even to me, and I don’t agree with anything called 40% as a tax rate on principle. It was the first rational breakdown of the tax I’d heard.

Despite this solid backing from a professional, and the various forms of ideological gymnastics in Australian politics on the subject, I see some other problems.

So, some questions:

1. The actual tax rate paid by miners is now subject to dispute. Rio Tinto states that its real effective tax rate is currently 35%.

- What are the actual rates of tax paid?

- Can somebody clarify why, if it’s believed miners are paying less than their fair share of tax, this is the case?

2. Notably lacking in this situation is a working model of how this tax will operate.

- Can someone give an example of the super tax model of the mining companies after paying normal taxation?

- Are they paying this tax on a declared profit?

- If so, is this double taxation?

3. The fact is that Australia’s miners have interests all over the world.

- Is it possible that the super tax will simply mean their profits will be routed offshore?

- What are the possibilities of tax evasion through overseas channeling of funds?

- What are the safeguards against evasion?

As you might have gathered, there are a few holes in this conceptual bucket. A revenue system works better when there aren’t gaping holes in it for simple evasion. The tax rate looks to me like an arbitrary figure, not a considered rate. 40% could be considered a working disincentive for compliance.

Although like most environmentally conscious Australians I have some reservations about the mining industry on a semi-regular basis, it’s not like the industry doesn’t contribute to this country. I’m dubious of the merits of a scheme which seems to be based on a direct confrontation approach. I’m much more dubious of the benefits of a tax which has received such massive, unanimous opposition from the industry.

If this tax is to be a working proposition for revenue, the reasonable expectation would be that it would operate on a clear statutory basis, with appropriate balances, deductions, and entitlements to the companies paying it. So far, the sum total of information is 40% tax on profits.

That’s not good enough.

This isn’t an actual model of the tax, but it’s an interpretation which doesn’t look good.

Mining company makes 100X profit.

Regular tax removes 35X

+ Super tax removes 40X

Balance = 25X

That’s 75% effective tax, more than double the current tax. Nobody’s suggesting that’s the case, but it’s an example of how vaguely this issue is being described.

It’s not clear, it’s not showing any legislative framework, and it’s not showing any indication of understanding capital issues for the miners. The mining industry is capital intensive, and huge amounts of money are being plowed into the new mining projects in Western Australia.

Some more questions:

- Where is the capital for these projects supposed to come from, if not from capital?

- Where are the returns for shareholders and investors?

- Where are the incentives for investment?

These questions must be answered. “Trust me, I’m a politician” isn’t going to cut it.

This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com